Archive for January 2015

The quarterly earnings announcement season is in full swing for large tech companies. This past week IBM announced its quarterly financial results and SAP issued guidance. Oracle did the same a month ago. Each of these companies is still showing reduced overall revenue due to the shift to cloud computing. On the surface, this would appear to be a big problem. When companies undergo radical changes that drop revenues, everyone has to worry that their favorite supplier may become the next Sun, Palm, or worse, Novell which is only a shadow of its former self.

I, for one, am not worried. Yes, these quintessential IT companies are taking it on the chin revenue-wise owing to the shift to cloud computing. Cloud computing is disrupting the traditional on-premises software businesses and wreaking havoc with vendors’ hardware units. Major shifts in a market can cause these type of short-term effects on any business. Just look at how the introduction of shale oil has effect the otherwise same energy business, dropping oil prices precipitously in a year. The current disorder in the IT industry is, however, over-shadowing the future benefits of cloud computing.

See, the problem lies in short term versus long term expectations. On a quarter to quarter basis, less money is being made by IT companies switching from traditional to cloud models for their products. Yet these cloud businesses are growing rapidly versus stagnating software and hardware businesses. On top of that, cloud business are locking in revenue far into the future. The traditional model of hardware and software requires customers to make big upfront investments which generate a lot of money all at once. Cloud business generate revenue over time but that revenue is stickier. Big upfront investments make it hard for companies to make decisions about a product; Subscriptions ease the worry that a wrong decision will be made. When IT products start to age, especially hardware, responsible IT managers reevaluate vendors opening the door to competitors; With cloud services offering constant updates and incremental cost increases, it’s easier to stay with what is already in place.

Of course, these are the strategies of growth companies in the IT sector. Companies such as Amazon, Salesforce.com, and Netsuite are successful because they reduced resistance to sales and locked in customers for the long haul. They act like media companies, worried about innovation and churn as much as scoring big deals. I suspect this is what is messing with the heads of the financial analysts the most. They see companies that should be acting like lumbering dinosaurs, grazing safely in placid waters free of major predators, acting like nimble up and comers. Stock prices are as much a reflection of perceived future value as present value. Financial analysts are used to viewing companies such as IBM, SAP, Microsoft, and Oracle act in a certain and predictable manner. That major IT companies are taking steps to ensure they don’t become lunch for some upstart should suggest more value in the future. It’s just not foreseeable what that value will be. The outmoded models no longer work well, as is always the case when big changes are in progress.

So, while market analysts (like me) are predicting accelerated growth in the IT market because of the shift to cloud computing, financial markets will continue to punish the major companies that are embracing these changes. Ours is a long-term view based on successfully delivering superior products and services to customers. Theirs are short-term models based on financial metrics from an earlier age.

This week I ran into an interesting problem. My email stopped working. That is, my Microsfot Outlook and Lync could no longer communicate with our cloud-based Office 365 Exchange server. Microsoft support was flummoxed. I eventually found the solution and it lay in system updates. By applying an optional system update to my laptop, not an Office update, I was able to get back to normal. Certainly makes you wonder what the word “optional” means in this context. If it is necessary for applications to work, it’s probably required not optional.

Although Microsoft never admitted it, it is very likely something changed in the back-end. Nothing had changed with my client applications so the Exchange server network connections were the most probable culprit. I have my theories about what happened but they are just that unless Microsoft wants to confirm them. Somehow I doubt it….

This experience highlighted a big problem with cloud computing: change control. When most of us analysts or IT professionals talk about control we think of data. We are concerned that data may be compromised or used inappropriately. Security and privacy of data is an important but rare problem. What we give up with cloud computing is control over knowing what is going on in our systems. For example, if my client applications are using SSL3 and the cloud vendor deems this a bad idea, they might deprecate it’s usage to make the system more secure. A vendor might then push out an update to client applications so they can continue to communicate without using SSL3. Sounds reasonable but the IT professionals or perhaps even end-users have to know and want to apply the update. There are lots of reasons not to apply updates for all machines. It is also not unreasonable to want to know just what these updates might do and what will happen if you don’t apply them. Even seemingly simple changes can break a system and cloud customers have to trust cloud vendors that they will know what these updates are doing.

SaaS applications are not immune to these issues either. Cloud vendors crow all the time about their APIs that allow integration and customization. Even small changes in an API can cause unwanted behavior in custom integrations and applications. When applications are hosted on-premises, IT can decide whether to apply an update, waiting for when the organization is ready, adjustments to custom applications can occur, and when IT has full knowledge of the results. With cloud applications, customers are working on the vendor’s timetable. Changes will roll out when the vendor says so and integrations and customizations adjusted immediately.

This is not to suggest that cloud applications are a bad idea. There are so many advantages to the model that volumes have been written about them. However, companies have to go in with eyes wide open. Customers are relinquishing control over everything from costs to features to changes. Ask anyone using SharePoint online who hosts their website on it about the effects of vendors driven changes. Microsoft will be removing this as a feature, effectively causing customers to find an alternative hosting platform. Maybe they will grandfather in current users of this feature but that’s not what they are saying. Instead, customers are being told they have to migrate and they don’t have a choice in the matter.